FS KKR Capital (FSK) 5 May 232023 Q1 Earnings call transcript

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp's First Quarter 2023 Earnings Conference Call.

Your lines will be in a listen-only mode during remarks by FSK's management. [Operator Instructions] Please note that this conference is being recorded.

At this time, Robert Paun, Head of Investor Relations, will proceed with the introduction. Mr. begin. may you Paun,

FSK, morning, recorded, XXXX to XX note earnings Corp the conference be to KKR Good throughout will the Corp's call. call an the that KKR audio first days. Capital Today's as referred be quarter conference is may for Fund and you. or FS Company being welcome call Capital FS the and Thank available call. of Please replay

morning. release information included this a FSK Replay press that is issued in

FSK on with presentation to performance posted addition, containing supplemental March its financial a In Web site, ended is its and XXXX. quarter financial respect for XX, information the portfolio

A Relations Presentations. is call property note the prohibited. and section any that of Please the the unauthorized rebroadcast FSK. strictly is of in link the site call today's Investor and of on company's webcast form Events this presentation this is to Any Web available under

risks required call could and by to risks recent that includes you refer factors undertake with these update results are FSK's not Today's or cause statements statements We that FSK could differ to so generally. materially important SEC for the FSK economy affect filings subject forward-looking ask conference that most uncertainties and from or outcomes statements. forward-looking its to to does actual do unless to that law. the

measures. call financial this non-GAAP addition, certain In include will

financial to prepared isolation first reconciliations directly Non-GAAP for should GAAP. should nature can or morning, filed comparable in not in accordance not should XXXX. most considered measures, be this be the release information considered with related considered quarter and the earnings and information FSK's such substitute that supplemental found as X, the For a May GAAP in in SEC in be with nature measures supplemental be was

companies. site. please financial latest measures FSK's the Web of obtain reported named similarly measures non-GAAP same by visit In company's SEC be not filings, as To may other copies these addition, the

will joining Dan Lilly, Officer Drew and call Also Brian and are be today's Gerson, in Wilson. and O'Toole Pietrzak, Co-Chief Officers, Investment us room Co-President; Speaking on Officer. Steven Co-President; the Financial Ryan Chief Chief Operating

the over I to call Dan. now will turn

Thank Michael Conference not to participate due everyone, is Capital able XXXX Unfortunately, on you, scheduling Call. welcome, FS to Corp's First Forman Earnings today's conflict. to Quarter unavoidable Robert, and an call KKR

again respectively. investment For per net income the public our and share, income operating as first our to adjusted $X.XX investment generated share, quarter, net strong as team totaling results guidance $X.XX FSK $X.XX of per share and per compared $X.XX totaling delivered

as share the $X.XX asset increased distribution investment the quarter-over-quarter in share and Our by our slight repurchases. value offset net decline modestly our value of was accretive portfolio per out-earning

remained activity first M&A (ph) the quarter. [used] during

million billion March, liquidity repurchased As With shares. inquiries a in level program liquidity. our our $X program, our available the committed buyback regard to approximately $XX of with as $XXX of up portion we a new seeing investments. repurchase completed investment previously million ended approximately first ramp result, we of of are remaining and million we $XXX we share perspective, activity team said, From weeks. recent the That originated quarter during

results, base our supplemental our consists which share, of and distribution a of continued per per $X.XX our a Board per financial of on share, declared $X.XX Based distribution quarter of share. strong $X.XX second has distribution

our of per beyond, distributions strength $X.XX minimum possibly and overall quarter share throughout of As earnings per quarterly a the per distribution the based to of a $X.XX expect on total XXXX. a quarterly reminder, share during to company's minimum supplemental power, equating we of XXXX,

end between in of and Additionally, will the now three equal we announce distributions pleased which are per to $X.XX XXXX. special paid share, installments totaling be

our over the targeted to additional level with have to achieve income this a investors income. worked several pleased as We we spillback be to share of diligently are quarters in position last

three Our our of distributions additional regularly the equate quarterly and an next share special supplemental top over $X.XX per on quarter quarters. distributions per to

achieving an of in As March which yield of of operating we per a total XXXX able years. be XX, and approximately minimum recent $X.XX a we XX.X% result on yield XXXX, asset targets, based share is to of rotation equate annualized work will significant to our last distributions shareholders value, XX% an on price. receive to We believe believe our net investors with based have ability over our provide the that the on further share portfolio our five distribution such accomplished attractive

has quarter Turning to in XXXX the the the XXXX, financial banking first continued the market with current and markets the in challenges space. especially economic of volatility during experienced during we environment, the

rate tied inflation rate of to market degree continue with asset-based interest expect we believe asset our investment structures higher are some strategies views of] coupled such longer contain accurate, last believe to environment (ph) then the attractive. and than inflation will pools we investment floating We to and observers collateral prove protection, a remain expecting. will elevated, Should finance large [percent portfolio companies which as remain

the companies. call compared high-quality does While lower points average for opportunities the to approximately compelling remain are next create private we for transaction volumes increased investment levels protection, on investors quarters, for ago. are to KKR extremely and FS volatility higher players. originations expect other do attractive and debt few large-scale year overall other able below and a negotiate Spreads new and M&A basis enhanced to We economic XXX pricing, leverage uncertainty

re-price portfolio perspective. to support believe important is will private as from to as existing documents, companies quite a benefit continue loan to large positions like market debt platforms, incumbency protections investments we us in current which our Additionally, from well existing rates, portfolio FSK, allowing to

maintain borrowers continues and to investment have pass have operating adapted demonstrated helped ability EBITDA current to have which price acceptable environment, margins. perform to the as Our portfolio well our successfully increases, an through

approximately from KKR. companies companies, invested of during As originated investments existing and quarter in XX% funding in the million originations to earlier, investments. by $XXX resulting These coming on were I we add-ons previously of mentioned first our focused and portfolio opportunities

combined net $X of sales investments, of million net million. our equated factoring when with in increase new through $XXX sales portfolio and repayments to joint venture, Our a

at terms the interest the had coverage first a times. portfolio companies median quarter, In our interest coverage, of of of X.X end

was clarity, using this portfolio company base financials. December with XXXX as rates align XX, of calculated to For

teams potentially activity, and challenging during portfolio teams our work periods we extremely by origination stress, lower-than-average able our evidenced we seamlessly These operating dedicated are during more workout unit governance As alongside in dedicated market selective our origination of our arise and to situations which to Also, remain underwriting benefit and from navigate teams. deal internal are process. monitoring environments.

a quarter, which requests, not a end in experienced of view amendment we have significant first increase That being said, the through we as the positive.

With over more discuss the to call Brian that, I'll portfolio in to detail. turn our

Thanks, Dan.

our XXX of had a billion, of XX fair XXXX. the portfolio companies investment portfolio. of XXX XXXX, as approximately of As quarter, of consisting At March portfolio $XX.X fair represented companies. companies of This portfolio billion value XX% $XX.X the of largest fair portfolio value December a our and our compares XX, value end to first XX, the of

continue debt lien XX.X% XX% secured We XX. first of investments our secured as of portfolio consisted as on March senior loans and senior to focus

which the of represented joint first loans X.X% of our secured XX.X% are lien asset-based the addition, and comprised value venture fair finance or asset-based investments. predominantly portfolio, represented In of investments finance

senior joint our debt secured in our total Looking XX% through consisted March of to venture, portfolio XX. as of investments the

was of consisted our first investments weighted investments, new on of and loans, debt the X% equity yield accruing in quarter, of XX, in compared XX% in in December XX.X% The and XX% debt, as During approximately other March asset-based average XX.X% XXXX, lien originations to first subordinated finance X% XX. investments. as

As yield during quarter to accretion new yields the primarily weighted base during quarters. as FSKR. the well our first on few the exclude was as a associated average the is with average yield with reminder, rise higher adjusted past merger associated weighted in increase the continued originations The in the rates with

effects investment of This of by of we is comprised originated activity, total experienced investment the during XXXX. quarter, March the or portfolio to approximately compares of now March as Credit, the investments at the XXXX Advisor. FS KKR KKR first our XX% XX% XX, either XX Including

first on $XX portfolio impact the During net we approximately depreciation experienced of million. accounting, excluding the of quarter, merger investments

which leader for related during Wittur on Reliant quarter in impacted issues the a the elevator were and adjacent production movers negative portfolio, equipment of the in Rehab. the performance components a are markets the global and focus Elevator segment, Outsourced of largest The by is credit Wittur with doors, and aftermarket. both our Components manufacturing new

including construction as services as loan well facing company in to slowdown led to China, this wage a in a given in our offers labor has the speech has factors physical, second-lien company The market us across The health occupational productivity, the care which Rehab industry, tight macroeconomic in increases. and quarter. affected contract and Reliant nursing by placing on facilities. and services U.S., has labor been labor inflation nonaccrual persistent inflation therapy driven a in increase skilled decline headwinds, been

to like on comment focusing Miami investment. provides visits, Medicare Beach Medical Miami home Medical specialty care, members. on pharmacy care, in-house another primary Beach also Group. Group primarily I'd and Advantage

operating experienced growth, to debt In has company and included the down $XX amendment, an due expenses first-lien recently paid The the quarter, weaker inflation. par membership wage related at which first elevated provided performance we a from medical expenses, sponsor. lower higher million to

cost fair student placed of with market During combined million $XX debt a we non-accrual $XXX of million. the quarter, on investments and value a

addition, as $XX a quarter's removed on In activity, fair cost there XXXX. cost $X three XX, value X.X% investments the million a value fully a a combined X.X% market to of a portfolio and from basis, value non-accrual million. a Based fair and on XX, a XXXX with debt of are March compared cost basis as status, non-accruals of first on X.X% December of basis, totaled and on on X.X% of fair basis,

based it provide helpful KKR originated We assets on would Credit. also the with the information thought be market by to

a to X.X% X.X% the originated the on a quarter, portfolio, were FS been of end KKR XX% of non-accruals total by fair our of relating Credit cost Advisor the and value basis has the and on KKR which basis. As

turn to And with that, over the I'll call Steven.

Thanks, Brian.

to we pleased this a special a November are August in shareholders paid will installments reward share May, in and of earlier, be of with year. which mentioned three $X.XX Dan per distribution, declaration As equal

should special and per a three of total quarterly distribution for with $X.XX of share. $X.XX Combining minimum supplemental XXXX $X.XX distributions our share This per quarterly be our base per share March distributions, represents stock of yield XXXX both price, current an XX.X% yield quite on net as view we attractive. which and a share our of $XX.XX XX% value asset XX, our on the per

and investment to driven increase Total fee follows. income as financial investment interest by our dividend increased $X increased decrease million income quarter, income of an million, our quarter-over-quarter. total million, income. quarter was of by $XX income The interest results were $X $X the totaled a Turning total components first million, the for quarter-over-quarter, million, during of quarter-over-quarter, $XXX

Our during income and dividend income companies recurring portfolio summarized income million. as from million totaling from And, dividends joint fee quarter other is our dividend follows, various the fee $X approximately venture, million. $XX approximately totaling of $XX first

due million. quarter-over-quarter base debt Our of on million increase interest to $X expense $XXX the facilities. impact An secured totaled of our rising rates

weighted Management fees of March during fees X.X% million $X million, totaled incentive $XX first the cost And, million XXst. of Our quarter. average debt of was as totaled $XX decrease quarter-over-quarter. a

per per of bridge of as decreased decrease investment $XX.XX on asset by share share per our quarter-over-quarter net increased due income value was $X.XX overall ending value asset net was of our XQ $X.XX portfolio. and the value our basis XXXX in by per detailed to follows: on a A investment net GAAP a share is share

per share to Our perspective, increased to during March net sum and in of quarter activities repurchases. $X.XX we XXXX investment expect share XXXX results a reduced share income our paid expect was these GAAP And, quarter of to per income by $XX.XX. guidance our per share $X.XX by A asset net dividend per value $X.XX $X.XX share. net we From approximate second investment forward-looking value adjusted share. asset due the net per per approximate share XX, a

million is expected second the income guidance quarter basis M&A approximate recurring $XXX a follows: as below activity as expect to average is we on continue to interest our Detailed quarter. GAAP during

our We expect income approximate recurring to joint dividend associated $XX venture million. with

million. From standpoint, We fees expect other we $XX expense fee to expect approximate million. our and dividend approximate to an $XX management income

million. fees to $XX expect incentive We approximate

expense to million. $XXX $XX expenses And, expect G&A to approximate We expect interest million. other we our approximate

are net of not the Other As share to affected. categories interest GAAP investment quarter expenses our and difference income investment our This investments merger adjusted of our between accretion the due during our revenues per a $X.XX the to our income. reminder, difference net relates income affects and accounting. recurring expected

unchanged approximately In billion. were their at to and the and cost $X committed gross XXX%, our unsecured At XX, which our are terms fourth was And debt. average balance sheet of the end balance of the liquidity of Both right XXX% side levels X.X%. of sheet, levels. effective March At XX% XXXX. XX% debt balance available of respectively the of March sheet was was our and first our equity of drawn our quarter net XX, quarter, debt of comprised from overall

call And that, with a back we remarks open few turn I'll call for Dan before the to the closing for questions.

portfolio deliver portfolio from uncertainty shareholders In results operational the to we standpoint point And beyond. an with for remains, such goals XXXX can rotation our continue for rate the closing, overall Steven. and shareholders. a where of in our well-positioned believe economy and have overall strong Thanks, to while we achievement is FSK pleased construction provide are possibly that distribution attractive we reached

we questions. With to open for call like that, the would operator,

you. line with our from John Thank [Operator Jefferies. first question And of comes Instructions] the Hecht

open. is go line Your Please ahead.

Good talk taking morning, in very deal. for you sourcing characteristics guys. of terms can the seeing my about more you question. said are you the I pipeline? of think activity Thanks recently up pick Dan, Maybe much

the terms do us John, either seeing or, from companies I happy interested go firms start near-term processes, very Yes, is rest M&A people year, up a environment the they think I a we're sense it financing more or the to, don't frankly, of push, who was indicating that's pick lent either sell-side this today somewhat be might but shoots M&A slow 'XX. I the inbounds inquiries we morning. in think of think in green remains or any to if will sell and big just but to business. early I money quite into that we bit end a year, of think for seeing. little guarantees lower or but bit good of it's overall My to are themselves who those

is overall there's ABS think then of obviously, best where the opportunity spread points pickup. the non-ABS you the dislocations I widest And any so there that focusing can at Okay. you have guys market, you basis portfolios. you -- arbitrage the the your point? part Maybe and XXX is mentioned are in then, certain Obviously on And in and guys market spreads? this

your XX.X% start an I'd two to wide lending better, yield points regular because market even the 'XX. extra existing they then is split let's are these loans on [indiscernible] sure in today. today lending see you're And pieces. probably call probably average portfolio XX% today companies. it's is spreads rate may of attractive direct The [indiscernible] obviously on arbitrage, mentioned movement, an Yes, it, we probably I'm both that basis direct the above that XXX been, floating versus not of but deals you new with for extremely I'd is pro. really on it new on I call probably where these or add-ons overall add have point where loans, top The credit couple new to

I focused attractive, quite just on feel, the so end defensive our when companies, middle especially upper companies in think of you're frankly, market, the that mind, downside-protected. well good, quite you That's

is has think move very So, quite been that material. lending I interesting, and market the direct

direct the think I asset-backed probably mentioned it. overall much above there didn't You side, probably lending, the available as move as returns still

for that can the there, I will capital or well. of, continue of get; has risk-adjusted rewards to the environment been we've busy deals I really, more either different investing parts as the been think structure I best we pivoting to different get -- more think think there us types

X.X then Maybe Okay. glimpse that the you think, just I portfolio could trends, us give EBITDA times and a mentioned, quick coverage. you And in revenue level?

Yes, no, happy that. do to

about talked we think that. we we make clear times, think I wanted how it I X.X calculated the to

the So, was LTM XX-XX that using number. sort an was of interest that number not

where the just about there. think that move big X.X, of that we sort are if take or so, curve, down you today probably from forward not benefit, your a For top we of to

happy growth, have seen think EBITDA still think year-on-year see I that. I we we're to

think are the about we're inflation real. little We've pass through companies worried points seen able been real, are points bit a but I the wage margins. to probably inflation prices,

quite managing it base ago, mindful we got a portfolio we're been but from probably, to it portfolio risk watch the quarters case in thought the about where I forward. So, of but and a the think outperformed probably handful going you have it, perspective, has I would

right, All much, congratulations very thanks on a and quarter. good

thank you. Right,

line KBW. question [Operator you. comes next Lynch with Ryan of Our from the Thank Instructions]

go Your line open. ahead. Please is

morning. good Hey,

mentioned Emerson in that of and you start is comes all and LBOs piggyback you hope pickup more question the was pick take also up, the share? picks that that has one-off? for that market of as My there's there just had coincide to on any obviously to Is switching a if to a activity, activity also market. do syndicated that lenders think well. though deal broadly going and deal M&A, loan with, to about does question there potential Emerson, of potentially direct syndicated up market, curious looking loan broadest some if of talk the [indiscernible] other the the sort they'll do First that from Or and for activity, then to that, kind is with on, some you to at I

deal. morning, I thoughts probably good mean Ryan. specific no the individual Hey, on

a just I to how to business. that company we're inquiry, sponsor sponsor. the I to lend maybe then or some to, of on prior deal more sort the the more of the think thinking to question, or sale situation, ways every responses, And on those forward I unique, John a in seeing is we deal, bit either existing a it think mentioned of a just we it's companies about -- we're seeing that lend we're bit if

comes clearly that go going I positive has So, that's as filled normal, five a the loan loan the in balance void sort markets change when at think sort back, this the point, syndicated for last probably the sort syndicated and news. market mean, of bit, we market, to debt or I of functions think loan not that four quarters will expect I of private bit away. of the a

and solution. we've is, of that other their think I tailwinds we access the And want know a to want They on feel debt to good lender, more they though think private what about, companies side seen just wanting the I execution. more trend certainty continues.

clearly loan syndicated think refinance these private companies the tailwind debt. market So, will of time, some for is the I but here over still

Okay, quartile times usually I hear that in your idiosyncratic about the just any happening think understood. lot bottom when are portfolios, BBC or And business. though, of would maybe new we performers to portfolio, in you love articles a of about your events if hear in that particular your than the your of non-accruals others been through portfolios, those maybe more environment? in seeing you're any you portfolio, are of not this able of but weed underperformance have common sort notice companies of somewhat struggling threads just just why to

chain we back, impacted or if issues, quarters, six think think, sort was I supply challenges. you it it four went have of event broadly, seen, companies let's call have probably that I

I has sit end we the maybe pass could price impactful. reliant probably of customers look stocked, outside sort on it's of if their think I pass a think companies who of I struggled or sort some but everything just you in, for are wages, up. bottom environment I keep I have revenue maybe today are probably we're that think and reason of sort is in to well wages been maybe of that an to sort And that, points, happened, of of to struggling. sector right, think And companies of with the XX% idiosyncratic of sort whatever today do that ability and not they been side I where lack at that do the through through think there's, generally side think sort the example, where that maybe price, environment has sort it's expense most wages on are heavily of who

Okay. lot in been going like affects of I in failures, the buyout the there's it to several business. one how probably just credit be sure LBOs had a disruption private I there's know bank. pullback last really sector, seems much kind I'm one. a of not your that banking overall with

competitors, how your a their of aren't not on So sure those and seem businesses. banks I'm holding much some be it maybe balance does really bank that assets sheet. that could ABL of But potentially competitor

So business some from in a any expect pickup to just you would retreat they of any or of in do love you pickup and from your retreat the that anything do sort in hear, I ABL potential banks opportunities seen have sort else? lending

quarter. a what's fair that's Yes, this question, considering happened

were out capital, banks product to corporate. who and right. the form I are That's financing. moves impact clearly ones better of an have need sort that we're to of probably about think I of the talking the on when I lending we way that Remember companies, than ABL providers who of that struggling banks more think probably were regional we inventory a direct regular shape business. those talked on alternative lot are the you you're companies ABL, about mean and due don't receivables and what the probably to we're mentioning access a

it capital broader will both credit. a as of the to our that history and My I is flow. left. to probably mortgage think of be the not I sense void pieces corporate is markets that asset-based you finance more with private more really sort everything going to And fill there confuse banks deal be can but that might debt sort the on should those tell regional come net piece positive not sort funding of the is effort. That's consumer that think is just economy, real

cause could a a market a other a impact -- their I either provide think the I being in from credit a on additional recession. step overall could a risk to balance an we're that bit volatility shrink from banks pumps mindful perspective taking some perspective and or that regional forced sheet back the think contraction side, little on said, the or

So about mindful we're think I all factors. those

just understand, so, yes. been I back negative has I The impact going today. time appreciate Okay. broadly, the understood.

All a right, have good day.

[Operator line Wedel the Our from next with of Instructions] you. question JPMorgan. Thank Melissa comes

open. is go line Your Please ahead.

much. so taking you today. Thanks Appreciate my questions

to repurchase the you quarter. guys share about possibly With completed trading share are they this future you another to on authorization, touch repurchase want authorization? pursuing which and shares are where thinking relative I First, activity NAV,

I of Good note things; mean I I $XXX morning, Melissa. the a completed we think couple would million. are happy we that

I that put think intend we've been when pretty these consistent sort to get place. complete we to the market they in of

BDCs we done were think five over We have I at most. of repurchased shares the amongst various million more another. one or $XXX time public last than years, the probably almost that

clearly, top this have considering on a line mind of we the in in something or on with go-forward past. So what that be will our basis, done are we've the

of shareholders. capital we're of is kind also which dividend, benefit the to the think for special I right, provide happy

between of $X.XX NAV. I the think the And on XX.X% continue with was on about feel about That the and to good XX sort additional talked six we've you're then up to we $X.XX, $X.XX that's this that. per share. prior XX, call the think I supplemental,

do were So that happy special is we we quarter. potential we good. this I income think the very think able to something But were was

and for revolvers on rates debt and you've unsecured few current your maturities split Yes, manage certainly. curve. how are the outlook between you you profile? of fixed -- perhaps interest thinking about sort are implied Thanks. forward follow-up the in to A we How rate got by than your XXXX should that guys And question a funding going how expect you higher forward? given remaining funding, funding

add Yes. deal, think it did unsecureds I did or and to we're of size. to the January, 'XX. of February even Ryan might of well, And beginning was very 'XX and decent Steve advance We happy all sort as we a but with this want in the

at if those about plenty a capital So investors. past going issuer. we maturities. to cetera. prudent, well, revolver accessed we've I other those think out to We in continue or markets. Obviously, to, quite the I right? I to think they un-drawn But want near-term to whether be just to look said, time, on be the the to think bi-laterals we intend to take of we we're CLOs, we're That needed be markets we're frequent so happy continue no going at sort talk of We'll to same have as and access et

we the bunch market. I tools intention be a comfort piece disposal. on where we a but is got of think that at So in to of active lot our un-drawn We've sit our for revolver, got of the

Thank you.

like the Thank over any you. to further remarks. And I would turn now back Dan conference to Pietrzak for

Well, thank time today. your for you, everyone,

a available we're always, for Have As any follow-up weekend. questions. good

speak quarter. next Let's

for participating. today's concludes call. Thank This you conference

You disconnect. may now